Research.LeutholdGroup

In response to client queries, we extended our research of small cap equities from last month. One angle we pursued was the relationship between small caps, quality, and business risk. The full report will be released mid-month.

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December’s Of Special Interest provided a recap of our Asset Allocation team’s view of small cap equities, suggesting that small caps had underperformed and reached a valuation discount that made them an interesting contrarian value proposition. Several clients responded with follow-up questions, wondering if the discount valuation of small caps was offset by their typically weaker business models.

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A preview of the upcoming Of Special Interest that will examine if the tortured process of Brexit is creating an opportunity to bottom fish washed-out and unloved U.K. stocks. Time to buy?

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Something remarkable occurred on September 9th. Momentum crashed and Value soared on that Monday, in what one analyst described as a five standard deviation event. Do we have a clear understanding of what really happened? This research project takes a multi-faceted look at what transpired during one unusual week in September.

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A major difficulty in picking stocks based on quant factors is the need to make trade-offs. A company that looks attractive on one preferred metric will likely look unattractive on another. This study examines the uncomfortable give-and-take that complicates factor investing at the stock level.

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One portfolio strategy that attracts our interest is a barbell between Growth or Quality on the bullish side, paired with a Low or Minimum Volatility sleeve for the bearish side. This approach deals with today’s uncertainties by essentially “deciding not to decide.”

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Investor sentiment seems to be unusually conflicted these days. There are worries aplenty, including numerous political skirmishes of consequence around the world, a slowing global economy, and lofty U.S. equity valuations. On the other hand, fiscal stimulus is high for this stage in an economic cycle and the Fed is easing monetary policy, two policy drivers it rarely pays to bet against.

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A recent trip to the Netherlands included visits to The Rijksmuseum and The Mauritshuis to view paintings including The Night Watch, widely acclaimed as Rembrandt’s greatest work, and Vermeer’s equally celebrated Girl with a Pearl Earring.

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We believe the results of every investment operation depend, more than anything else, on the quality of the investment philosophy and process that drives the portfolio.

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One of the virtues of quantitative investing is that it relies on measurable data points that fit smoothly into mathematical models.

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Signs of spring are popping up everywhere in the Financials sector. S&P Financials was easily the top- performing sector in April and several sub-industries have been bubbling higher in our Group Selection discipline.

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Quantitative investing has taken the industry by storm over the last decade, and smart beta ETFs are pulling in billions of dollars as investors and advisors gravitate to this portfolio management technique.

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Since the earliest days of security analysis—when the main question was which railroad stock to buy—Price to Book has been a cornerstone of the valuation process.

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The Social/Mobile/Cloud theme (SMC) has dominated the stock market in recent years, eventually reaching a frenzied peak in the summer of 2018.

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Quality is one of the most popular and successful of the smart beta factors. It is intuitively appealing and serves as a useful defensive strategy in market drawdowns.

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Social media, mobile computing, and digital life-in-the-cloud were the dominant storylines for U.S. stocks over the last five years—reaching the apex of popularity following the early-2016 market low.

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With the valuation of several high-profile Large Growth names well over 100 times earnings, we consid-er alternatives by examining the relative valuations between LG and other equity categories.

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This article summarizes our current research into the interaction between factors and sectors. We find that sector weights have a significant influence on some factor results, while the true factor impact is the key driver for others. Watch for our full report coming next week.

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As mania surrounding Apple’s stock was reaching a fever pitch in early 2012, The Leuthold Group wrote a piece entitled, Apple, Just How High Can It Go? To those caught up in the hysteria, the article served as a cautionary reminder.

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Whatever one’s philosophical leaning, the practice of adjusting earnings has left investors with too many watches to consult. We look deeper into the topic of adjusted earnings to gauge the slippage between commonly-referenced earnings clocks.

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Today’s market is barbelled regarding company size, with the mega-cap Tech stocks and the S&P 600 Small Cap index both outperforming the middle of the S&P 500.

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Analyzing quarterly financial results and developing insights about upcoming periods is always difficult, but the first quarter of 2018 was unusually complicated.

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Are Utilities defensives, or are they interest rate plays, or both? We believe the driving influence fluctuates based on market conditions, specifically fear, and the desire for protection in down markets.

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After performing amazingly well in the record-setting bull market run since 2009, defensive equities are once again drawing attention for their traditional role as hedges against a continuation of recent market declines.

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This months-long research effort culminates with this commentary as we lay out our thoughts on factor rotation and introduce The Leuthold Group’s recently launched Factor Tilt strategy.

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After a hiatus of several years, we are re-introducing one of our favorite analytical tools. A thematic basket is a custom-designed set of assets which are exposed to, and will react similarly to, a common theme. Our first new thematic basket is “Capital Spending Beneficiaries.”

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Several key drivers of capital expenditures look particularly favorable right now, and this research note focuses on the potential for improving business conditions to produce an upswing in capex.

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While we’re not calling for an imminent market top, we are keeping a diligent watch from the crow’s nest for signs of a coming market correction.

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With an abundance of year-end updates in this edition of Perception for the Professional, we plan to release the content for this “Of Special Interest” section separately in mid-January.

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Momentum is one of the most widely accepted alpha-generating factors, used by quantitative and fundamental managers alike. Its biggest drawback, however, is high turnover. Herein we explore momentum from the perspective of sector weights.

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Market history teaches us that investors behave differently in groups than they do as individuals.

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A fascinating aspect of long-running bull markets is the emergence of money-spinning strategies that come to be seen as “sure things.”

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Our Major Trend Index (MTI) recently fell from “positive” toward stocks to a “neutral” reading, leading us to trim bullish equity positions in our tactical portfolios.

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Relative performance of active and passive mutual funds is one of the leading story lines in our industry, with passive’s recent advantage leading some to argue that it will be the dominant style forevermore. We disagree, and believe that the active/passive relationship has been, and always will be, cyclical.

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In April 1964, the Beatles simultaneously held the top-five spots on the Billboard Hot 100, a unique feat in the history of modern music.

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Investment factors experience performance cycles just like every other asset and index. The Value factor is robust across definitions, as all eight versions produced positive excess returns under long/short and long-only methodologies.

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Despite real GDP growth of just 1.6% in 2016, the median S&P 500 company earned a net profit margin of 9.7%, only 40 basis points below the record high established in 2014.

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We examine past capex spending patterns and identify industries with sales growth rates that have historically been the most responsive to capex cycles.

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Profitable investing overseas requires not one, but two, successful decisions: 1) select an outperforming asset class; and, 2) be in a currency that provides a favorable foreign exchange impact.

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While factors do offer excess return they are by no means winners in all seasons. Our findings show that factor returns are cyclical, volatile, and unstable over time.

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